Chris Eckerman leads co-investing for the State of Wisconsin Investment Board, which was a pioneer among US public systems in formalizing its capabilities around direct investing. Eckerman spent time talking with Buyouts about the state of the PE market this year and how the slow fundraising environment is impacting things like term negotiations and co-investing opportunities.
Eckerman will join many other LPs on March 6 – 8 at the JW Marriott Orlando, Grande Lakes, for Private Equity International’s inaugural Nexus 2024. The event will help set the stage and provide a preview of what’s to come for dealmakers and LPs as the year unfolds. Meet the GPs and LPs you’ve seen quoted in Buyouts over the years.
Keynote speakers include: Jonathan Gray, president and chief operating officer, Blackstone; Howard Marks, co-founder and co-chairman of Oaktree Capital Management; and David M Rubenstein, co-founder and co-chairman of The Carlyle Group.
What is the state of PE fundraising?
There is very little urgency in the market because of the softness in the fundraising environment. LPs are overallocated and distributions are down. You can see the softness in the fundraising numbers. That softness is translating into a lack of urgency which is resulting in an elongation in fundraising cycles.
How has that enhanced LPs’ ability to negotiate on new funds?
Negotiations are highly situationally dependent. There are still some very robust fundraisings that have been sizable, fast one-and-done close situations. In those situations, there’s a lot less negotiating room or leverage. And then there are other situations where there is an opportunity to have more dialogue.
At the margin, the soft fundraising environment and general angst in the market presents opportunities to revisit some terms or at least be able to take a harder stance if someone is trying to change something in the current environment.
GPs are trying to make themselves more attractive and reach critical mass in order to demonstrate momentum on first closes. It’s more important, particularly if you’re trying to keep your fundraising cycle shorter. GPs in that situation need to be accommodating. If we’re a strategic first closer, you can market off our name, we’d like to get something for that.
How has co-investing held up and how are things looking this year?
It’s been a pretty good market for LP co-invest. Lower leverage means higher equity contributions, which results in GPs looking for partners to fill out the larger equity account. Some LPs, given where they are with their asset allocation model, are capital constrained. Luckily that really hasn’t impacted us, so that’s provided incremental tail winds.
To me, the key is what is happening with interest rates. If you look at the market, there’s a lot of folks wagering that rates will start to come down possibly in the first half. If that happens, I believe we’ll see a strong uptick in deal activity, which will probably be a tailwind for co-investment.
What’s your view on continuation funds?
They make sense in certain situations, but they’ve been used in a much broader set of circumstances than they probably should. You have pretty significant information asymmetry and typically have very fast decision timelines. In our case, we’ve got a co-investment team that understands underwriting single assets, but some of the LP universe doesn’t have that capability, so that puts them at disadvantage when it comes to evaluating these things.
When it was more bullish, there were continuation fund deals coming to market with premium economics. Fundamentally it just doesn’t sit right with me that a GP may end up making more money off an asset on the continuation fund than they would have if it stayed in the fund because of the way the structure works.
And it’s a competitor to co-investment. I’d rather see no-fee, no-carried interest co-investment in these situations rather than these continuation funds.
ILPA has done a great job in trying to provide a framework on best practices on what GPs should do on options and rolls, etc. That side of things has improved.
Lightly edited for clarity
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